Investing in ethanol

DID YOU KNOW that corn is a type of food? If you do, then you may have keener insight than some people who write headlines at The New York Times. I mention this because of the rather curious headline above an article in the business section of the Times (pg. C-7) on Jan. 5, 2007: "Rise in Ethanol Raises Concerns About Corn as a Food."

Huh? OK, let me see if I follow the logic. The background issue is that the world needs to find substitutes for depleting supplies of oil and natural gas. We know that, and you may well have heard it here first if you are a longtime reader of Whiskey & Gunpowder. We also know that ethanol is one of those potential oil substitutes. People have been running vehicles on ethanol for well over a century. But oil has been so cheap for so long that there was never any need or economic scale in using the hooch for internal combustion. (I mean, the kind of internal combustion within a vehicle engine.)

And we know that a lot of corn is presently being diverted to manufacture ethanol. This is a fast-growing industry, and we will discuss that below. But have we really reached the point where the headline writers are so value neutral on the issue of food versus fuel that they shamelessly imply that there is some sort of economic or moral equivalency between using corn to manufacture ethanol and refer to "concerns about corn as a food"? Give me a break.

Ethanol Plants and Half the Corn Crop

In true journalistic fashion, the Old Gray Lady framed the food-versus-fuel issue in the first paragraph of the story:

"Renewing concerns about whether there will be enough corn to support the demand for both fuel and food, a new study has found that ethanol plants could use as much as half of America's corn crop next year."

What? The U.S. will use half its corn crop next year to manufacture ethanol? This raises a kernel of concern with me.

As I am sure you all understand, corn that is used to manufacture ethanol will not be available for other things, like eating. Nor will this ethanol-destined corn be used to feed other animals, or turned into other foodstuffs, let alone exported to raise foreign exchange for the U.S. And of course, the price of corn will rise.

So corn-based food, and products derived from corn, will become more expensive. And I know, so you don't have to remind me, that farmers will respond to the price signals and grow more corn. But I hope you also realize that the farmers will do this by using more tractor fuel, fertilizer, pesticide, herbicide, and myriad of other substances derived from oil and natural gas. And the farmers will put into production the more marginal agricultural lands, with the less productive soils, which will then become depleted of soil moisture and nutrients. There is no free lunch.

Ethanol Plants Under Construction

According to a recent study by the environmental group Earth Policy Institute, the number of new ethanol plants being constructed nationwide has been underreported by more than 25%. According to EPI, there are 79 ethanol plants currently under construction in the U.S. When completed, by 2008, these new plants will more than double the annual U.S. ethanol production capacity, to 11 billion gallons.

This EPI estimate is a remarkable difference from the number of ethanol plants listed as being under construction by both the U.S. Department of Agriculture and an organization calling itself the Renewable Fuels Association, the main lobbying group for the ethanol industry. The Renewable Fuels Association has listed 62 plants as being under construction. The lower estimate of 62 plants has led forecasters to underestimate the amount of grain that will be needed for ethanol production. But even this does not begin to tell the entire tale.

The U.S. currently has 116 ethanol plants in production. The 79 more that are under construction will come online within about two years, allowing for some construction delays due to worldwide shortages of critical inputs and components. (The usual suspects...cement, galvanized steel, copper tubing, etc., thanks to the ongoing construction boom in China.) In addition, there are at least 200 other ethanol plants in the planning stages in the U.S., with a capacity estimated at an additional 3 billion gallons per year.

Gallons and Barrels and Energy Production

There are, according to convention dating back to the Pennsylvania oil boom of the 1860s, 42 gallons in a barrel. So the forecast annual U.S. production of 11 billion gallons of ethanol translates into about 262 million barrels of that type of fuel produced over the course of a year. And I am not even adjusting for the energy density of ethanol, which is far lower, only 59.5%, than an equivalent barrel of petroleum. The standard, accepted measurement of energy density for ethanol is 26.8 megajoules per kilogram. This clearly compares unfavorably with the energy density of gasoline at 45 megajoules per kilogram.

That is, 262 million barrels of ethanol will yield less energy when burned, less than 60%, than an equivalent volume of gasoline derived from oil. We won't go into a long discussion of that just now. Nor will we get into the energy return on energy investment (EROEI) of ethanol, which is about break-even at best. No, we won't go there. Let's keep on looking at comparisons.

Sure, 262 million is a lot of barrels of ethanol, and any way you look at it, the ethanol industry is putting big numbers into the energy equation. But let's look at some other big numbers. 262 million barrels of ethanol per year translates into about 718,000 barrels per day. (Divide by 365 days in the year.) In terms of volume, this is the energy equivalent of replacing about two supertankers full of imported oil every day. OK, not bad, and this looks like a lot of fuel if you are standing next to one of the two supertankers, but how much is it really? This is less than 6% of U.S. daily oil imports.

Let's look some more at the number, 718,000 barrels of ethanol. This number of barrels, coming out of 195 ethanol plants (116 existing plants, plus 79 under construction), averages about 3,680 barrels of ethanol per plant, per day. (More division. And yes, some plants will produce more than others.) The number 3,680 may be a lot of barrels if you happen to own the average ethanol plant, but it is a drop in the bucket of U.S. national aggregate demand for liquid fuel.

Many Plants, Relatively Low Production

Another way to look at it is that each ethanol plant, on average producing 3,680 barrels of product, will yield the ethanol equivalent of what is commonly considered to be a small onshore oil field. But consider EROEI as well. On an ongoing basis, the oil field is producing oil with only the "energy input" of the pumps that lift the oil out of the ground. The ethanol plant requires far more energy to operate, on an ongoing basis, than does the oil field. Or for another type of comparison, few deepwater oil platforms are economic to operate if the initial production is under, say, 5,000 barrels per day. Something has to pay for those expensive day-rates for the rigs, not to mention all the labor, steel, and high-tech equipment that makes those holes in the bottom of the sea. And really, when you do the math, 718,000 barrels of ethanol translates into less than 3.5% of U.S. daily oil consumption of about 21 million barrels.

Here is another comparison. 718,000 barrels of ethanol per day is somewhat less than the amount of oil that the U.S. produces daily from its vast array of humble, old stripper oil wells, about 900,000 barrels per day. According to the U.S. Department of Energy, the U.S. has 393,000 oil stripper wells in service. And there are about 260,000 natural gas stripper wells in service. These wells are typically operated by small, independent companies and pull product out of older fields that are long past their peaks. The definition of a stripper well applies to oil wells delivering no more than 10 barrels per day and gas wells delivering no more than 60,000 cubic feet per day.

Although the stripper well industry is extensive, it is not a part of what people call "Big Oil." Yes, the stripper well industry provides a good deal of employment at, literally, the ground level of many rural areas. And it is honorable work, performed by many fine individuals, a fact to which I can attest from personal experience in the oil patch over many years. But the stripper well industry is not in any way capable of supplying the U.S. with anything approaching its cumulative daily energy demand for liquid fuel. And the corn-based ethanol industry is still quite a bit smaller than the stripper well industry.

Back to Ethanol

So let's get back to that forecast of 718,000 barrels of daily ethanol production. What appears at first to be an impressive number in terms of energy supply (11 billion gallons per year) is actually relatively small. In fact, it is almost in the "rounding error" of the nation's daily liquid fuel consumption of about 21 million barrels of oil per day. Quite frankly, the U.S. could "save" more than 3.5% of its daily oil use if the nation's carmakers built, marketed, and sold smaller cars, and if the nation's drivers collectively bought them. Or we could see much the same result if drivers collectively slowed down and drove their big vehicles at 60 miles per hour, or if more freight went via railroad, instead of truck over the highways. And would it be too much to ask the soccer moms and hockey dads of the country to consolidate their trips so as not to waste gas? Or what if more people decided to take a bus or light rail to work every now and then? And wrap your brain around this, for comparison: The amount of grain that is required to fill a 25-gallon tank with ethanol, one time, could otherwise feed one person for a year.

So will the U.S. really wind up running its motorized culture on corn-based ethanol? According to Cornell researcher David Pimental, if the entire U.S. grain crop were converted to ethanol, it would satisfy about 15% of U.S. automotive fuel needs. The answer is no.

No Energy Salvation

The take-away point here is that the full-court press now ongoing in the U.S. to build plants and manufacture ethanol from agricultural corn will not provide any sort of long-term energy salvation for the nation. This major industrial and agricultural effort will yield ethanol product equivalent to about 3.5% of daily U.S. oil consumption. According to the statistics, as published in The New York Times, no less, ethanol production from existing plants and plants under construction is on track to consume about half of the U.S. corn crop. In some localities of the U.S. Midwest, almost all corn is already under agreement to be sold for ethanol production, essentially leaving no corn for other local farming needs. This will certainly cause a ripple effect throughout many farming communities, all the way to the shelves of the grocery stores.

From a national security standpoint, large-scale ethanol production from corn will not make the nation more secure in any measurable way. It will certainly destabilize the nation's food supply and disrupt traditional export patterns.

Maybe there is a better idea out there for making ethanol from cellulose waste products. And it is not as if a diversity of energy resources is ever a bad idea. So some production of ethanol from corn makes sense. But sometimes, just because something is a good idea, it does not necessarily follow that more of it is a better idea. It is the same thing with corn-based ethanol. Pro-ethanol agricultural, industrial, transportation, and tax policies will not provide the country with anything like the volumes of motor fuel that it needs to run the existing transportation grid. And manufacturing ethanol from corn will dramatically disrupt the U.S. food supply. Eventually, the nation will reap what it sows.

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